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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

Mehta & Co. is auditing Zenith Pharma Ltd. The auditor wants to understand the control environment. Which of the following audit responses is most appropriate under SA 315?

The auditor should evaluate whether management has built a culture of honesty and ethical behaviour and whether the control environment forms a sound foundation for the other control components. Merely accepting management's statement is inadequate, and a weak environment cannot be cured by testing controls in one area.

  1. ARely only on management's written statement that a code of conduct exists, without observing how it operates
  2. BEvaluate whether management has created and maintained a culture of honesty and ethical behaviour, and whether the strengths in the control environment provide a foundation for other control componentsCorrect
  3. CConclude that a weak control environment can be fully offset by detailed tests of controls over cash
  4. DSkip evaluating the control environment because it relates only to the largest companies

Explanation

SA 315 requires the auditor to evaluate whether management has created a culture of honesty and ethical behaviour and whether the control environment provides an appropriate foundation for the other components. Inquiry alone is not enough. A weak control environment cannot be offset merely by control tests in one area, and the requirement applies to every audit.

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